The Commodity Futures Trading Commission proposed amendments to its rule that details the requirements of chief compliance officers of futures commission merchants, swap dealers and major swap participants, as well as the obligations of such entities related to their preparation and submission of annual compliance reports to the CFTC. The goal of such rule changes is to make applicable obligations simpler and clearer. The CFTC also endeavored to better align its CCO and annual compliance report requirements with those of the Securities and Exchange Commission. (Click here to access the applicable CFTC Rule, 3.3.)
Among other things, the CFTC:
- clarified when the applicable rule requires that the CCO report to the board of directors or the “senior officer” of the registrant; senior officer means the chief executive officer or other equivalent officer;
- eliminated the existing requirement that a registrant addresses each applicable CFTC requirement that it is subject to in its annual compliance report when evaluating its written policies and procedures. However, according to the CFTC, “the CCO must still conduct an underlying assessment of the policies and procedures to meet the requirement of the rule.” Additionally, the Commission clarified that the annual report’s discussion of compliance resources can be limited to resources relevant to the specific activities of the registered organization (i.e., FCM, SD and/or MSP);
- consistent with SEC requirements, made clear that a CCO’s obligations to resolve conflicts of interests applies only to material conflicts and imposes an obligation on the CCO solely to take “reasonable steps” to resolve such conflicts. The CFTC also eliminated the obligation of CCOs to consult with the board of directors or senior officer to establish procedures to address non-compliance issues and amended its rule to require a CCO solely to “take reasonable steps” to ensure that a registrant establishes and maintains written policies and procedures for the remediation of non-compliance issues.
- The CFTC declined to define what constituted a material “non-compliance issue” in connection with the obligation of relevant registrants to describe such matters in their annual CCO compliance report. The CFTC said that one size does not fit all, and providing a definition “could result in an overly prescriptive model for many Registrants.”
The CFTC’s new requirements will be effective 30 days after the date they are published in the Federal Register. (Click here for background on the CFTC’s initial proposed amendments in the article “CFTC Recommends Amendments to CCO Obligations and Annual Reports” in the May 7, 2017 edition of Bridging the Week.)
My View: The final amended CCO and annual compliance report rule adopted by the CFTC provides some substantial clarification and simplification of existing requirements. However, as noted by the CFTC in its adopting release, unlike the relevant law related to swap dealers and MSPs, the law related to FCMs expressly permits CCO functions and obligations to be prescribed by a registered futures association (i.e., the National Futures Association) as well as by the CFTC (click here to access Commodity Exchange Act Section 4d(d), 7 U.S.C. § 6d(d)).
As I have previously advocated, the CFTC should consider delegating all matters related to FCM CCOs, including preparation of the annual report, to NFA. This would more closely align futures industry practice for FCMs to securities industry practice related to broker-dealers and allocate some oversight functions related to FCMs from the CFTC to NFA where, in light of CFTC budget restraints, they may more economically and efficiently belong. (Click here for access to Rule 3130 of the Financial Industry Regulatory Authority entitled “Annual Certification of Compliance and Supervisory Processes.”)